Europe's next big risk is the 'Merkel-exit'

Last year, everyone was worried
about a "Grexit,"
and some folks have started mumbling about
a "Brexit."

But now there's another big "exit" risk looming on the
horizon: the "Merkel-exit."

"For the first time in a decade in power, German Chancellor
Angela Merkel’s political future is in question," Citi
Research's chief global political analyst Tina Fordham wrote
in a recent research report.

"Although in our view the Chancellor could very well weather yet
another test of her leadership and go on to win a fourth
term, we regard a Merkel-exit ahead of German elections (due
in 2017) as one of the most destabilizing political risks for the
EU, and one with the potential to impact markets," she argued.

Merkel has arguably been Europe's strongest leader since the
financial crisis and was front and center handling issues like
the
Greek crisis and negotiating the Minsk
Agreements in the last year.

Already
back in January 2015, over half of Europeans wanted to see
migration curbed.Credit
Suisse

However, her decision to warmly welcome the
refugees in 2015 was extremely unpopular both at
home and in the rest of Europe. Her approval ratings
plunged sharply to 49% in November 2015, down from 67% in
August, according to data cited
by Fordham.

The most recent stab to her political position follows the
mass New Year's Eve sexual assaults and other attacks on
women in the city of Cologne, Germany that were attributed to
gangs of mostly migrant men. These attacks further inflamed the
debate in the country over her policy toward the refugees.

"European policymakers are struggling to resolve the
refugee and migration crisis, which follows in the wake of a list
of challenges ... and is emerging as a significant source of
political risk," writes Fordham.

"The potential for the refugee and migration crisis to
destabilize the EU could eventually overshadow Grexit (in any
case a lower risk for 2016 than in previous years). Could it
also be the undoing of the European politician who has done the
most to attempt to address it?" she asks in the
research note.

Populism
is surging as refugees bring increased political
pressures.Eurasia
Group

Notably, a weaker Merkel could mark a shift in Europe's
trajectory, which Eurasia Group president Ian Bremmer
and chairman Cliff Kupchan
argued in theirtop
risks for 2016 report.

"This year, Merkel’s extraordinary welcome to refugees will
draw fewer followers inside her own country, and virtually none
outside it," they wrote in the report. "This will undermine her
political position, and could encourage a domestic challenger
over the coming months."

"That leaves Europe with less ability to respond collectively to
any crisis (expected or otherwise)," they noted — a
point that's especially significant given that, as mentioned
above, Merkel has long acted as the de facto European
leader in collective crises.

Additionally, Merkel has been the "biggest
advocate of open Europe" — or a Europe that's open to the
world, and has borders between (most) European states open to one
another. So, if she is in a weaker position, "open Europe," too,
could now be at risk.

"It creates a dramatic change in how Europe interacts
with itself and with the rest of the world," Bremmer
and Kupchan wrote. "More resentment toward Germany
from others in Europe will undermine its political capital. The
refugee issue will play out across Europe as the proximate
cause."

Ultimately, the "Merkel-exit" is not something that will
necessarily happen — as noted above Fordham.

But it's hard to argue against the fact that her
political position has already weakened — especially given that
so many people did not support her decision regarding the
refugees.